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An Early Look at Things to Come

by | published November 28th, 2011

I made it back late Saturday night from my meetings in Germany.

While I was there, the German Central Bank (the Bundesbank) was unable to sell its full complement of bonds… for the first time ever.

That resulted in an immediate market dive in both Europe and the United States. Thus far, investors have regarded Germany as a “safe haven” and the Continent's strength amidst an ongoing debt crisis.

Now fears have emerged that even the strongest of the European economies has begun to feel the pressure.

This sets the stage for a shaky upcoming week of discussions about Spanish and Italian bailouts, the future of the euro, and the eroding power structure in Brussels.

The impact of the credit situation also took center stage during my meetings in Frankfurt.

The topic of my meetings centered on how to fund an expanding number of energy projects in Poland.

Not just any projects, remember, but the exploitation of major unconventional shale gas basins that could literally change the energy face of Europe.

Unconventional gas includes gas from shale deposits, coal bed methane, and tight gas (fuel reservoirs locked in impermeable, hard rock).

As I've said before, access to shale deposits has transformed the North American energy picture in less than five years. Now, Poland has committed to a rapid development of its own shale formations.

In fact, in September, Polish Prime Minister Donald Tusk interrupted one of my presentations to a government commission meeting in Krakow to make this policy announcement! Still, it is one thing to announce an intention and another to see it through…

The Challenge: Making It Happen

In this case, fields need to be identified and geological exploration must take place.

These stages are followed by seismic readings, test holes being spud, data collection and interpretation, pad construction, and well completion… All this before the gas even begins to flow.

At that point, an entire network of compressor stations, processing facilities, and pipelines need to be available for companies to bring the gas to market.

This will likely be the most expensive single infrastructure project ever attempted in Poland. Some of the technology and knowhow is already there domestically. But most needs to be financed and imported.

Now some of the work is underway. A few international majors, such as Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), along with a range of middle-and smaller-sized U.S., U.K., Polish, and other European companies, are already taking stakes in what should be a high-risk and high-return undertaking.

But while the prospects look promising, this optimism is based on fewer than 10 test wells and very spotty geological data. Most of the heavy lifting will have to be done from the beginning. That means billions upon billions of euros (and dollars, and zlotys, and pound sterling) are required in investment.

And that's where my meetings this past week in Frankfurt come into the picture.

Investment Strategies for a Cash-S
Against a backdrop of an intensified European credit crunch and the absence of traditional investment-generating vehicles, a new approach is forming.

Truly, this is “an early look at things to come.”

Most of the necessary funding will come from what will become a staple in such undertakings – structured closely held companies parlaying private investment into:

  1. asset holdings; followed by
  2. the spinning off of equity issuances as tradable stock.

The first makes use of a considerable amount of capital off the table in Europe (because of the debt crisis) and the United States (resulting from economic uncertainty, concerns over debt contagion from the continent, the failure of the misnamed Congressional “Super Committee,” or any number of other misgivings – take your pick).

The second, however, is a much more recent addition.

Following the success of Master Limited Partnerships (MLPs) in the U.S. market and asset holdings similar to them, this approach is now poised to serve as a major stimulus for the Polish.

MLPs control the midstream play in moving gas volume. But companies can adopt the MLP model for anything from lifting oil or gas to refining and processing the flow. As a result, American examples are also present in field operations, production trusts, distribution networks, even processing facilities and refineries.

Here is the interesting part…

In the United States, such partnerships are allowed, by law, to “pass through” all profits directly to the partners, without incurring corporate taxes. When the partnership, therefore, chooses to issue stock representing a portion of the entity, those shareholders commonly participate directly in profits through rather hefty dividends.

Expect to see similar structures emerging in Europe to fund the Polish energy push. The share issuances will likely be in higher volume capital markets such as Frankfurt, but the parent partnerships will be Polish.

Another opportunity could emerge from this story, too. And it may end up be the most exciting prospect of all.

Balancing Expectations

In the U.S., concerns are emerging over excess leaseholds and declining prices for natural gas. Stated simply, there are now deposits that could produce a substantial volume of gas. However, they are currently off-line because that supply of gas would further depress already weak market prices.

These holdings have value, but they cannot be directly utilized until forward production balances stabilize.

I have proposed that such American holdings serve as collateral for European MLP-clones. That would provide a source for investment (based on the book value of the American holdings) while, at the same time, allowing U.S. owners of idle leases to realize some revenue flow from Polish projects.

Once the Polish projects are up and running, the holdings there can become sources of finance for developing deposits here in the United States, and, in the process, serve to balance gas expectations on both sides of the Atlantic.

These days, it seems, just about anything is possible.

I'll let you know what happens.

Sincerely,

Kent

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  1. Jeff Pluim
    November 28th, 2011 at 14:01 | #1

    It is my understanding that these MLPs do not actually limit any potential liability to the investors. If that is the case, then to expand that potential liability to North America is insane. I know that the environmental considerations are not as strict in places like Ukraine and Poland. If there is an environmental catastrophy then all of the investors will become FULLY liable. Mom and Pop investor could lose everything they have.

  2. David Goldman
    November 28th, 2011 at 18:01 | #2

    There is a little diamond in the rough technology (called OZONIX) that I’ve been reading about for the past two years by a company in Stuart FL able to perfectly cleanse fracking water for continual re-use and eliminate the very small amount of chemicals that corrode well site shafts, and the best part is…this company does it ON SITE, faster and cleaner than any company in the world. Here is the site-watch their videos: http://www.ecospheretech.com After learning about what they are able to do-it behooves me why people are so “up in arms” about fracking-as fracking techniques will help to free us from the stranglehold of foreign imported OPEC countries’ products as we convert the US to a gas based energy system. I truly hope someday, Dr Moors recommends to me and his other faithful followers Ecosphere Technologies as a place to invest-this company has the key to solving “the controversy” regarding polluted fracking water. DG

  3. Jim
    November 28th, 2011 at 22:30 | #3

    The article was a bit obtuse, but I am confused by your post and the comment “that these MLPs do not actually limit any potential liability to the investors.” What is the basis for that statement??? That is the whole point of a master LIMITED partnership. Anyone who has been asked to participate as a general partner in an oil or gas well has seen the kind of risk that has been raised above — environmental or brown field (EPA) super fund liability. That’s why an MLP is so much more desirable, despite the tax issues and more limited return in most cases. Dr. Moors’ proposal seems a bit far fetched to me, if only because the tax ramifications would be so complicated. However, better minds than mine can weigh in on that. In any event, some investment vehicle can be devised to facilitate investment if there is money to be made.

  4. Cheryl
    November 29th, 2011 at 00:11 | #4

    I think the point is high returns and dividend trickle income from MLP. The dividends are going up.

  5. Robert Berke
    November 29th, 2011 at 00:43 | #5

    I also don’t really understand how Dr. Moor’s proposal works. For me, the central purpose of MLP’s is that they hold revenue producing assets that are distributed to limited partners. How can non-revenue producing assets like green field leases be used to distribute profits? And if not distributing profits, what tax benefits can be claimed? As Jim notes above, perhaps some other investment could be devised, but I don’t see how it works with MLP’s.

  6. Kevin Beck
    November 29th, 2011 at 20:35 | #6

    @Jeff Pluim
    Limited Partnerships WILL limit the liability of individual investors (the Limited Partners). The General Partner is the one that assumes all liabilities for the partnership. This is one of the tenets of partnership law. It is also the reason the Limited Partners are referred to exactly as that: Limited. Their liability is limited to their original investment. On the other hand, their profits and rights to distributions are also limited by the General Partner, who will take his share of profits before distributions to Limited Partners.

  7. Jim
    December 1st, 2011 at 00:32 | #7

    Thank you Kevin for that clear-stated and logical explanation of these MLP’s.

  8. Cheryl
    December 2nd, 2011 at 16:15 | #8

    Gel is listed as a sell on marketing grader for a long time.

  9. Henry Ceglowski
    December 9th, 2011 at 16:41 | #9

    what dose this all mean to us land and royalty owners

  10. Richard Craig
    January 4th, 2012 at 16:20 | #10

    Gentlemen:

    Can you advise how I can get in touch with Dr. Moors directly? I can introduce Him / The Polish Government to a Hybrid Financing Program that would offer Grant Money ( as apposed to long term loans, or demanding JV Partners ) – - – if there is interest ). Thank you for you help.

    Regards,

    Richard Craig
    All Cash Funding Associates
    215-918-2384 tel

  11. February 28th, 2012 at 02:34 | #11

    They set these off in increments blowing small holes up to 30 inches into the surrounding shale deposits.

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